Markets “In a Nutshell” for May 16, 2022
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average fell 2.10%, the S&P 500 was down 2.40%, and the NASDAQ fell 2.80%. Foreign stocks (MSCI EAFE) were also down, falling 3.20%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 2.93%. (Data source: Wall Street Journal)
Inflation Begins to Slow
The CPI (consumer price index) reading for April was released last week and came in at 8.3% year over year. This was higher than expectations but is lower than the previous reading from March which was 8.5%. Now that inflation is beginning to cool off the question will be how quickly we can get back to the target inflation rate of 2%. Although inflation was lower than last month, we are still at unprecedented levels and the Fed will continue to be aggressive in trying to slow inflation and bring it back down to its target. Many believe the next two rate hikes from the Fed will once again be 0.50% hikes, some even suggesting a 0.75% rate hike. The Fed has a challenging few months ahead as they try to slow inflation but not lead the US economy into a recession.
S&P 500 Earnings & Economy
The S&P just avoided entering bear market territory last week with a strong rally on Friday. When the market has a dip such as it has to start this year, many worry about a recession occurring shortly after. While this is a major worry, the economic data is still relatively strong with employment at very high levels and the consumer continues to spend. With the recent pullback in the market, equities now have lower earnings multiples which are now more in line with what we have seen historically. The earnings multiple on the S&P 500 had declined 30% since the peak last year as the Fed begins tightening which typically puts pressure on equities. This would signal a slowdown in earnings for companies after a 50% increase in 2021 and a 9% expected increase in 2022. When looking at pre-pandemic earnings, the S&P 500 has increased earnings by 33%.
What is the average price/earnings ratio for the S&P 500? (Scroll Down for Answer)
Have a Great Week!
3. 16 times, the S&P 500 typically trades at 16 times earnings, we currently are around 20 times which is a little lower than when the pandemic began.